Tag: Pricing

As I outlined in my summary on the Hamburg Aviation Conference, my friend Daniel expressed his believe that within 20 years, there will be no more passengers fees.
At the same time, Michael O’Leary was recently quoted that he expects in very short time they will offer the flights for free.
But flying costs money, no matter how good the aircraft engines become, terminal construction and maintenance, ground handling, air traffic control, gasoline, pilots, cabin crews, aircraft, insurance, it all needs to be paid. And no matter how effective you calculate …

… someone has to pay the bill.

Airlines lower their ticket prices, covering the “loss” with “ancillary revenues”. While those “ancillaries” have been understood as services previously bundled (inflight meal, baggage, flight insurance), they meanwhile extend quite into “inflight shopping”.

At the same time, traditionally airport landing fees, split into the landing and passengers, covered for the airports’ cost of operations and development. This basic, sensible model is now threatened. It will change. But how. When the airline and airports fight for the revenue of the passenger – I believe both will loose.

Airport Duty Free

So currently it is a fight between airport and airline for the money of the traveler. I hear airlines expressing their anger about the airports increasingly draining the pockets of the passengers pre- and post-flight. And the airports upset about architectural changes enforced by the evaporating aviation income, forcing them to add shopping in arrivals halls and rebuilding terminals for improved shopping, i.e. forcing the passenger through the duty free store. Or how to speed up the check-in process to increase the dwell time of the traveler to spend more money shopping. And the shop owners about the increasing pressure to cash in on the passenger in order to pay the expensive rental deals with the airports. And, and, and…

And no, it does not help to imply that the politicos should provide airports similar to train stations. Yes, it is true, airlines bring business to the regions. Airports are important infrastructure. But in the end … someone has to pay the bill.

What we will need is a serious, joint discussion about the future business model in aviation. At the moment there is no discussion. There’s the airlines, the airports and business models that cannot work. And we need to have the politicos and the usually government-controlled ATC (and border control, security, etc.), we have to have the ground handlers, the shops and all other players on the table. You can’t reconstruct all the small airports. We don’t need a fight. We got to work together for a sustainable business model. ERA, AAAE, IATA, ICAO, this is your call.

Two bad news hit the media this week. Ryanair removes flights from Budapest and Memmingen looses the scheduled services to Hamburg and Berlin. As Michael O’Leary (the Ryanair boss) had already announced that Ryanair will ground aircraft in winter (last year they grounded 80), this seems to be rather strategic and O’Leary’s argument it would be because of high airport charges may be just a smoke-ball, decepting the media. Memmingen on the other hand…

It gives me reason to highlight and explain a bit of the Crystal Ball used in airline route planning. It starts with an idea. Who brings the idea up is irrelevant, except it may be a good idea to do a bit additional research, if your boss does.

Having the idea, question is: Is it feasible? So as a route manager, you’ll talk to the airport, you check MIDT-statistics about flown passengers on the route or routes from neighboring (=competitive) airports, you check “facts”, such as official statistics on commercial relations between the two regions, attractiveness to potential tourists or “VFR”-traffic: Visiting Friends and Relatives. Statistical data…

The MIDT-data is by nature incomplete. Often it does not include direct sales with the airline, Internet sales, etc.. Even if it does, it is based on historic data that relies on facts that are meanwhile outdated. Have the commercial relations strengthened? Did they suffer from bad connection and have faded away? How much were, are and will the travelers be willing to pay for the ticket? If the flight failed, why … hard facts preferred, not guesswork or interpretations by the airports involved.

There is something called “catchment area”, based usually on isochrones, frequently a wild guesswork by the airport itself, more wishful thinking than reality. While working with Yulia on the basics of the CheckIn.com-isochrones, I found in all cases we checked discrepancy larger than 10% different from the airport’s own figures. And in all but one case, the “catchment area” did not cover at all that there are other airports competing with the traveler! An example: If you live in Minden, Germany you are about equally distanced to four airports: Hanover, Paderborn, Münster/Osnabrück and Bremen. For the CheckIn.com-isochrones, we took into account the size of the airport – number of passengers, as the more passengers, the more likely that people choose the larger airport. The distance – the closer it gets by driving time, the better. And other factors we considered relevant or only partially available – like flights to the destination and the weekly frequency and seats (the higher the more “competitive). But quite some more! From that, the system now calculates “fully automatic” the isochrones. And the results are devastating! Even on a “global” airport scale.

The smallest discrepancy of the catchment given by the airport of how many potential travelers would use the airport to the catchment we calculated was 50%. The high ones +90%. That is just basic statistics.

On top of it, you have the questions we did not take into consideration when we worked on the isochrones. Like VFR, like commercial relations, like tourism interest, like … And you better know, where you got it from, how likely it is to be overly optimistic or (sometimes, rarely) pessimistic…

Having that information, you start fine-tuning. You likely have several possibilities, depending on the passenger potential. Take a bigger airplane with more (cheaper) seats and lower frequency. Or take a smaller one with higher frequency, what the business traveler’s will like, but the seat being more expensive. OECD gave some figures for a rough calculation I found quite reasonable for a first idea: An Airbus A320 or Boeing 737 with 150-180 seats costs about 8c (Eurocent) per seat-kilometer (not mile). Use this form to multiply that with the distance for yourself. That is the “net cost”, so add the (increasing) taxes and surcharges onto that cost to come up with an idea about the ticket price you need as an average for flying break-even…

A route planner takes into account much more accuracy, such as real cost of operations, variables depending on aircraft and total hours of weekly/monthly operation. But for a start…

Now comes the next tricky step: How many seats can you likely sell from A to B at this average price, and how many might connect to C but use your flight from A to B? Do you have interline or codeshare agreements at the destination? What air fare do you get? Do you operate the long-haul-sector as well? The cost there likely is cheaper as the aircraft is bigger. But you got to have an idea on connecting services – a science of its own…

So now, at the end of that exercise, you can calculate your risk – how many passengers are you sure about using the offered flights? If you are unsure, your risk is 100%. If you have 50% guaranteed load, you risk less. You also get support from the airports usually, either financial, or “marketing support”. Compared to your operational risk, these are “peanuts”. And in the beginning, you run high risk, so it is wise to not calculate that on your predictive models – if you can’t succeed without, you likely loose.

But then comes the key-point, most airports today fail to have an answer for. Having finally calculated the risk, who takes it? In most cases the airline, virtually alone! Under such circumstances, why should an airline risk a new route with questionable return of investment? In charter flights, the tour operators (sometimes) take the risk, also mostly on their own. Lately, unused seats on some business charter flights, operated by large corporations are being made available to the public, either via Internet or GDS (travel industry flight booking systems).

And if that works well, from such a “business charter” a “scheduled service” with a higher frequency can evolve. But in most cases, the airline is left alone. Any question, why they limit their risk, by pulling the plug when the losses pile up beyond their worse case scenarios?

With eroding net profits, eaten by kerosene, excessive flight crew salaries, taxes and fees, the ability to build a new route in two to three years is very limited. If the route does not take off immediately with a reasonable load factor, the losses pile up so fast, the airline risks extinction if it does not keep a tight control on it.

That’s a short summary into the “science” of airline route planning. If you are an airport who seeks a new route, better do your part of the homework. Can you convince your local “catchment area” population to support the flight, even if the schedule and fares in the beginning may feel higher than from one of the competitive big airports in reach? Will your travel agents sell your flights with fervor – I’ve seen travel agencies at airports offering flights from Frankfurt, Munich, Düsseldorf, but not from the regional airport they were living at! Do you have a grip on the local VFR market? And most important: Can you get commitments from your corporates, business associations (chambers of commerce) or politicians about guarantees on how many seats they could fill? If you are a touristic region: Can your tourism managers qualify, how many people they will have flying on the route? It is fantastic to see, how ingenuous most of the tourist boards are about such basic facts: “Fly and we’ll see”. Flown for a decade, not seen…

Okay. As I’ve put it in the past (as a German saying goes): I take a big long stick and grope in the dark. It requires expertise, experience and good guesswork to do something with all that information you get. Good luck is part of the business.

To summarize planning of new routes:

The quality of figures available, as well as my trust in them.

The cost of operations

From those: A more or less realistic load factor expectation.

Who takes the risk?

The first two factors are subject to an educated guess…

And what about Memmingen and Budapest? Memmingen likely has to do above homework now, there obviously was a discrepancy between expectation and reality. And Budapest? I honestly believe Ryanair simply cuts aircraft there for winter – they may want to talk to others if the routes justify a year-round traffic! That may convince Ryanair to consider the next winter. Or do the above homework as well to match expectations and wishful dreaming with the harshness of reality.

“You can make a pizza so cheap, that nobody wants to eat it”
[Gordon Bethune, former CEO of Continental Airlines]

Being asked about my sanity to invest into Join!, the start-up of an airline network, this article is about “cheap pizza” or why I still think it is a good idea to start a regional airline today.

In order to complete my statistics about the passenger development before / during / after I’ve been working at Erfurt Airport, I had a look at the monthly development, as well as the annual one of Erfurt and Germany (published by ADV.aero) and Europe and the world (published by IATA) as a comparison.

IATA reports EU, with 9,5% growth 2011, the second strongest market in the world. That is behind Latin America, but before Asia! The market being challenged by political mistakes, increasing the tax burden on aviation. Milking aviation until it collapses instead of strengthening it in its role to attract and support commerce is sure short sighted expression of ignorance. Unfortunately, this political development makes Europe at the same time the global area with the lowest profits world-wide and – to my understanding – has forced the collapse of a number of routes, airports and airlines in the past year. Where the failure of one, opens the opportunity for the other.

ADV confirms Germany, having added aviation tax in 2011, to have only grown by 5,0%, visibly below EU-average. This may also be a result of the struggling by Air Berlin and Lufthansa to cover up for the resulting strain on profits, closing down a number of routes, focusing on their hubs. Which opens opportunity on several of these abandoned routes.

Recently, Cirrus Airlines and Spanair, the one being a code share partner of Lufthansa, the other being a Star Alliance member, ceased their services and filed for bankruptcy, leaving more routes unserved. The failure of one opens the opportunity for others.

Airplus (leading credit card provider for companies and business travel) reports that the business travel in Germany will increase exponentially compared to other markets. At the same time, the average air fares are increasing.

There are some airline operational models, that can be used exclusively or in a combined operation.

Hub & Spoke (Network) Airlines

Low Cost Carriers

Regional Aviation

Business Charter

Tour Operators

Hub carriers usually operate one or several hubs, routing passengers from and to smaller places through their hubs into their networks. This is mostly the classic way, airlines operate since the 1980s. In those days, the airline took the financial risk to establish new routes. Challenged and responding to low cost carriers, their ability to do so has eroded.

Low Cost Carriers compete with, making them virtually a mix between hub carriers, regional airlines and charter operators. They operate point-to-point-services with larger aircraft, offering ability to start with lower air fares. They temporarily profited from the fact that airlines had to build war chests to finance the establishment of new routes. Meanwhile they come to recognize that operating an airplane is a cost factor and as the established airlines responded to their threat, the advantages they built upon increasingly eroded.

Regional Aviation is usually referred to as the operators of smaller aircraft of up to 100/120 seats maximum. Their focus is to establish air services for regional airports with limited passenger numbers. Using smaller aircraft, they can operate higher frequencies required by business travelers, still being of less interest to the low cost airlines, usually operating mid-size jet aircraft (100-180 seats) with a lower frequency and focusing less on the business traveler’s needs.

Business Charter usually fills the gap, where the operation for a scheduled service between two airports is not supported by the passenger numbers needed, but business travelers need to go either on a customized schedule and/or traveling between airports not connected by existing scheduled services.

Just to complete the picture: Tour Operators have aircraft flying leisure travelers seasonal between their point of living and their place of vacation. The aircraft can be owned by the tour operator, it can be charted exclusively by a single one or a group of tour operator(s), or it can be offered to the tour operators. As such, there is a business opportunity for airlines focusing on operations for business travel, to offer their aircraft on weekends, midday or night to tour operators.

On the positive side: Hans-Rudolf Wöhrl, who already founded NFD (today Eurowings), later bought and turned arouned DBA, now joined into the board and invests in Intersky, a smaller regional airline in Friedrichshafen, Germany.

Updated 2015

So why attempting to launch a regional airline just now?

The major carriers straighten out their networks, focusing their routes to serve into and out of their hubs. Low Cost operates usually larger aircraft, accommodating the leisure traveler with lower frequency. Many routes are served once to trice a week only, making them less likely to be of interest for business travelers. On the other end, business aviation reports a surge in demand.

Likely the increasing demand for business aviation reflects the reduction of flight services by scheduled airlines (be it major airlines or low cost). Business travelers are not as focused on the air fare. It must be competitive, but their focus is frequency. If needed, they charter the aircraft to enable the necessary business trip.

So it needs careful route analysis. How many people will travel between A and B? Flying between A and B with a 50-seat aircraft twice-daily service (daybreak) plus twice on the weekend at 80% load factor generates 25.000 seats a year. That means 25.000 return tickets to be sold – of 50.000 one-way tickets. Double this for a 100-seater… And when you fly that, what do you do with the aircraft between the morning and the evening rotation? Can you utilize it at night? An aircraft standing around looses money. So you better consider the options for a secondary service that utilizes the aircraft in midday. And if you have local tour operators interested to charter the smaller aircraft for their services, utilizing it on the weekends or at night adds to improve the return-of-investment for the aircraft and its operations.

But yes, no matter how well you qualify your route potential, it remains a risk. So you got to find investors to believe in your route analyses and believe (or need) it. You can also talk to other involved parties or bodies, such as airports, chambers of commerce, politicians, companies and reduce the risk by having commitments for tickets. Remember, we talk about 50.000 one-ways every year… But in the end – this does not have to be subsidies, it could be commitment to sell a certain amount of tickets.

That said: There are many routes, which require business-frequency with smaller aircraft and would not work with lesser frequency but bigger aircraft (and fares), as the business traveler would not fly only one-way. Increasingly, the retreat of the major carriers from the regional airports opens up opportunities for smaller airlines. Our idea of a “network” offers those small, “individual” operators access to know-how, distribution, services and quality usually available only to larger scale of operations.

Every failure or retreat from a route or airport opens opportunity for someone else. Though the times, the airlines’ take the risk alone are over – if you start up, you better find out, who comes with you on the journey.

Food for Thought. And yes, I appreciate your thoughts.

As Richard says: “For those who agree or disagree, it is the exchange of ideas that broadens all of our knowledge”

According to IATA General Secretary Giovanni Bisignani, aviation warns of a decline in global aviation. But is that reasonable? Yes, global economy suffers. But look at the global maps and you will find a clear relation between airport and decent aviation and the size of cities. Aviation is a key motivator for business, but the travel industry suffers from a major inferiority complex:

Travel Agents: Any financial consultant who at the end of the year gets you €1,000 interest a year will be decently paid, but the consultant where you spend €5,000 for a vacation shall work for free?

Airlines: Global economy needs aviation. But thanks to price dumping (and not only since “low cost”), airlines operate for years at the edge of commercial harakiri.

In December, I was asked by an airline manager, what I would change in the airline industry if I’d have a chance. What I mentioned, many of you heard from me before again and again:Remove the price tag from the tickets!No other industry in the world provides the information about the price the seller pays for the product. Or you would not buy a car or even a yoghurt without arguing with the cashier about a discount! This is a relic from the decades when airline tickets were decently priced and the travel agent truly was an agent, receiving 9% commission. At the time, many agencies cross-financed other business with their airline sales. An Economy Class ticket for €2,000 at 9% was a nice deal… The hotels, at the time frequently not paying the commission were “negligible”. That’s “the good old days”! Gone.
But if the travel “agent”, or better the travel consultant sells today, they get no commission. Then why do the airlines show the price? It is totally outdated thinking that must be addressed.

The second thought I had in mind I mentioned last week: Airline sales is “suddenly” en vogue again. The managers promoting sales-free and sales-independent “self service” and “internet” without a strategy find themselves the most hit by the financial crisis and the recessive commerce. Because cheap flights sell themselves, but they are also the most vulnerable. Selling a product is a question about long-term relation. So better have or build a sales team with a personal reputation in their market. As they represent you.

Looking at the financial crisis, many companies reconsider their sales focus. What I addressed in my ASRA-presentation this year suddenly seems to trigger. Everyone can sell cheap. So if you are in sales, you need to focus your attention on the products that need sales support.

This week, I had quite a discussion about the validity of my sales strategy and business development. Interesting enough, my supporter was an airline that just recently anounced another increase in net earnings. Their German team has also exceeded sales targets. The offense was voiced by an airline sales manager, who’s company just published another loss for the last quarter and is expected to accumulate overall losses this year.

The focus of the successful airline is on the specialists: Tour operators, travel agencies, corporates.
Anyone not having a focus on their destinations is serviced with a lower priority. Effort is only targeted to the specialists who they pamper and invest time to visit and invite. The elephants (consolidators, internet portals) producing large but price-driven turnover are running aside.

What we wondered is the focus of many managers on turnover, volume and market share, not on revenue. That’s the managers impressed by “large numbers” and quick volume, not caring about cost or long term relations. How long has the sales manager been the same to the customer? How experienced is the sales manager? What is your strategy?

Food For Thought: Especially the aviation industry is in need for a reevaluation of values. If I hear IATA-secretary general Giovanni Bisignani anounced a drop in passengers by 4.8%, in Asia even 7.8%. The airline industry is predicted to accumulate losses of 5.2 billion dollars this year?!

So if passenger numbers are going down, a logical consequence is to focus an increase in yield!

Do I miss anything? Want to change? Interested in Business Development?
Contact me.

Is low cost at its end? Lately Ryanair sued a German tour operator for combining Ryanair product with hotel, etc. for a travel package. Concern was posted, if that was an intelligent move, though I did reply that it was in line with O’Leary’s public known strategy.

But now Ryanair grounds aircraft, stating it would be more expensive to fly them. Just two years ago, talking about the need to turn around aircraft faster, O’Leary assaulted all other airlines, stating an aircraft needs to fly, time on the ground loosing the company”s money. 180° turn…

Ryan Air now tests “hand luggage only”. That’s a niche of the niche. With a body diameter of about 3,6m and no cargo hold, how about a “Mini-A380”-design with two levels, adding passenger capacity in what was the cargo hold? “Sub-Economy”? Who needs seats? I used the above image in this year”s ASRA-presentation, I didn”t know, how advanced my thinking was.

Now Ryanair reports an 85% drop in net results for the first quarter, a net loss of 60 Mio. Euro being a serious possibility. Just two weeks ago, I just mentioned the joke here about the guy purchasing the screws for 1 $/€, selling it for 99c. No Mr. O”Leary, selling your seats for 99c does not improve your revenue…

A hotel manager regretted the change from the RAC-Rate to the BAR (Best Available Rate) and compared it to Yield Management in Aviation.
Three misinterpretations in one sentence…

The rack-rate (off the Rack) has always been – and is – the rate, anyone “selling” a room was allowed to book at. Unconditional. That rate – in that definition – exists until today and must exist.
Many hotels fixed a rate and called it “rack rate”, published on the indoor or in the locker… But the rack rate is as variable through the year(s) as is any other “rate”. So there seems to be a misinterpretation of a definition by some…

What is the Best Available Rate? It”s one of these meaningless phrases, these politicians manqué in Marketing love. See next.

Third misunderstanding: Yield Management.
I experienced the development of yield management in American Airlines, who made this an art first (late 1980s). And it is an art! The definition for yield management was explained to us at an employee conference with Bob Crandall himself (to date a model “airline manager” to me). In short: They are there to optimize the own pricing structure to achieve the “best available selling rate”. To do that, they got tools to monitor the prices of competition, they took into account long term developments, including public holidays, regional vacation periods, congresses, events, … And they talked to the local sales teams to assure to be aware of trends – something you cannot do to date with technology only! Within two years after launching the department, it employed more than 3.000 of the best people American could find or hire and had achieved a revenue increase making that effort very valuable. I do recommend to have a look at the Wikipedia article on Yield Management.
Today, most managers believe, Yield Management is purely technical. But it is a predictive art. Many managers only look at a single puzzle piece: A good yield manager can be worth an entire sales team. But that does not say you can replace it. In most airlines, the yield management rarely speaks to sales, they stick to the “electronic reports and figures”. Stupid, they miss an essential “early warning system”…

Best Available Rate… The boss of my business training (whole sale) emphasized two rules I found invaluable:

Don”t bleed out your supplier. He has to live. If he lives safely, it”s also to your own benefit.

Price dumping is a Pandora”s Box. They undermine the trust in your products.

And there was a joke that at the time was historic already: “You purchase a box of these screws for 1 Dollar, you sell them for 99 cent, how could you?!” Answer: “You stupid don”t understand that. It”s the quantity that counts!”

Our industry (aviation and hotels alike) have paniked themselfes into price dumping. To date, I question the competencies of any manager, blindly following that path. In 1997, a senior airline manager (unquestioned by his peers) alleged that brand has no value any more. Customers would only purchase by price. I did argue strongly against it. And today argue no less for brand. Everyone can sell cheap. But you get no cheap loyalty with customers, you need brand loyalty!

So what is the Best Available Rate? Can that be the dumped price? Is it the best selling rate? How does it link to the Rack Rate? I don”t blame the pricing managers, they only do what their senior managements ask them and express as expectations. But maybe you should reconsider your pricing “policy”? Create one…?